Rating Agency Turns Cautious

Standard & Poor's said it is examining the credit enhancement requirements, cash-flow assumptions and "possible revisions to its LEVELS and SPIRE models," given that reports about early payment defaults on 2006 U.S. RMBS vintage for many product types "continue to abound."

At the same time, S&P said that all-time record levels of customer debt reported at the end of the third quarter of 2006 feature a positive development: Most of America's debt is good, appreciating mortgage debt.

S&P is monitoring customer borrowing trends and debt evaluations, and expects American customers to "continue to run up record debt both in absolute terms and relative to income," as shown by a recent report.

It found that although the pace of borrowing has slowed down since the 2001 recession, "average household debt hit yet another record: 136% of after-tax income in third quarter of 2006." One positive development, however, is the household financial environment, S&P said, since a record 76% of household borrowing is mortgage debt and that is considered good debt "because it's used to acquire a presumably appreciating asset, compared to only 69% a decade ago."

Meanwhile, if mortgage borrowing is expected to decrease mainly due to interest rate increases, non-mortgage-related debt is expected to grow. And that type of debt usually translates into weaker assets since they are not secured by real estate, that "in part because of the refinancing boom, which has led many borrowers to consolidate their debt into their mortgage," S&P said.

The goal of the LEVELS and SPIRE model revisions, said Monica Perelmuter, a director at S&P, is to initiate proactive discussions with major issuers and originators about trends in underwriting, servicing and performance of transactions. "Underwriting guidelines may have been loosened as lenders competed for borrowers," Ms. Perelmuter said. "Early payment defaults may occur for various reasons, including loosened underwriting, layered risks, macroeconomic conditions, origination fraud and government regulation."
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